In re Vantive Corp. Securities Litigation
| Decision Date | 15 March 2002 |
| Docket Number | No. 00-16136.,00-16136. |
| Citation | 283 F.3d 1079 |
| Parties | In re The VANTIVE CORPORATION SECURITIES LITIGATION. Glenn R. Fischer; Brian Fischer; Joshua Rizack, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. The Vantive Corporation; John R. Luongo; John M. Jack; Kathleen A. Murphy; Christopher W. Lochhead; Roger J. Sippl; David J. Jodoin; Michael J. Loo, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
William S. Lerach and Eric A. Isaacson, Milberg, Weiss, Bershad, Hynes & Lerach, LLP, San Diego, CA, for the plaintiffs-appellants.
Shirli Fabbri Weiss, Gray, Cary, Ware & Freidenrich, LLP, San Diego, CA, for the defendants-appellees.
Appeal from the United States District Court for the Northern District of California, William H. Orrick, Jr., District Judge, Presiding.
Before: CANBY, HAWKINS and GOULD, Circuit Judges.
The issue before us is whether the complaint in this securities fraud class action states a claim under the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u 4(b)(1), (2). The district court held that it did not, and dismissed the complaint without leave to amend. The plaintiffs appeal, and we affirm.
This action is brought under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. § 240.10b-5. The plaintiffs allege violations of the Act and Rule on behalf of a class of investors who bought Vantive stock between April 23, 1997 and July 6, 1998 (the "class period"). The defendants are the Vantive Corporation and certain of its officers and directors. We summarize the facts from the complaint, and assume these facts to be true for the purposes of our decision.
Vantive sold and serviced customer relationship management software (called "front-office software") that enabled field personnel to deliver customer service across many channels, including the Internet, a call center, or in person. Vantive made its initial public offering in August 1995 at $6 per share. Enjoying rapid sales and earnings growth, Vantive's stock price increased to more than $35 per share by late 1996. In April 1997 (the beginning of the class period), however, Vantive's stock price dropped to $14 per share as two competitors announced disappointing results; many believed that this particular software sector had peaked.
The plaintiffs allege that, beginning in April 1997, the defendants made knowingly false and misleading statements about the competitive prospects of Vantive's products and the growth of Vantive's sales force, and falsely forecast increased revenues for 1998 and 1999. The plaintiffs also allege that the individual defendants caused Vantive to manipulate and falsify its publicly reported financial results by prematurely recognizing millions of dollars in revenues for software licensed to resellers even though the resellers were not obligated to pay for those licenses until they sublicensed the product to the end user. Allegedly as a result of these misrepresentations, Vantive's stock rose to $39. During the class period, Vantive allegedly acquired two other firms by issuing 874,000 shares of its common stock and selling $60 million in debt securities to raise capital. Also during the class period, the individual defendants sold 1.39 million shares of their Vantive stock at prices as high as $31 per share, for a total of roughly $36 million in insider trading proceeds.
On July 6, 1998, Vantive revealed that its results for the 1998 second quarter would be worse than earlier forecast, that Vantive was appointing a new head of North American sales, and that it was going to reduce the size of its direct sales force. Analysts slashed the 1998 revenue and earnings per share forecast for Vantive. Vantive's stock fell to as low as $11 per share and performed poorly thereafter. Unable to compete successfully as an independent company, Vantive was sold to the Peoplesoft Company in October 1999.
On July 6, 1999, one year after the end of the alleged class period, shareholders filed three virtually identical complaints against Vantive and the individual defendants. After these cases were consolidated, and the plaintiffs filed a third amended complaint, the district court granted the defendants' motion to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6). The district court concluded that the plaintiffs had failed to meet the heightened pleading requirements of the PSLRA. The court denied the plaintiffs leave to amend.
The PSLRA significantly altered pleading requirements in private securities fraud litigation by requiring that a complaint plead with particularity both falsity and scienter. Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir.2001). The purpose of this heightened pleading requirement was generally to eliminate abusive securities litigation and particularly to put an end to the practice of pleading "fraud by hindsight."2 In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 988 (9th Cir.1999). A securities fraud complaint must now "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief,3 the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). If the challenged statement is not false or misleading, it does not become actionable merely because it is incomplete. Brody v. Transitional Hospitals Corp., 280 F.3d 997, 1005-06 (9th Cir.2002). Further, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2) (emphasis added). Thus the complaint must allege that the defendant made false or misleading statements either intentionally or with deliberate recklessness or, if the challenged representation is a forward looking statement, with "actual knowledge ... that the statement was false or misleading." 15 U.S.C. § 78u-5(c)(1)(B)(i); see Ronconi, 253 F.3d at 429; Silicon Graphics, 183 F.3d at 985.
In this case, the plaintiffs allege that, over the course of a sixty-three week period, the defendants: 1) knowingly made false and misleading statements about Vantive's ability to sell its products, 2) knowingly made false and misleading statements concerning the quality of its products, 3) manipulated Vantive's financial results, and 4) falsely forecast future revenues. In support of these allegations, the plaintiffs also allege that the individual defendants engaged in suspicious insider trading and corporate transactions. As we discuss below, these allegations do not meet the requirements of the PSLRA because they are not sufficiently particularized and do not raise a "strong inference" that misleading statements were made knowingly or with deliberate recklessness to investors. Ronconi, 253 F.3d at 429.
Most of the complaint is premised upon Vantive's July 1998 press release announcing "lower then expected" earnings. Starting from this announcement, the plaintiffs speculate in hindsight that earlier projections made throughout the prior fifteen months must have been false for failure to disclose adverse facts. The complaint does not allege contemporaneous facts in sufficient detail and in a manner that would create a strong inference that the alleged adverse facts were known at the time of the challenged statements. See Ronconi, 253 F.3d at 432. Indeed, the bulk of the alleged adverse facts are generic, subjective, difficult to prove or refute, and could be alleged against almost any company that has experienced a drop in sales revenue. The 102 page complaint rarely, if ever, sets forth a particularized basis to support the existence of these "concealed facts."
The plaintiffs first allege that Vantive deliberately misled investors with respect to its ability to sell its products. The complaint asserts that, throughout the class period,4 the Vantive defendants continually stated that the growth and performance of its direct sales force was "on plan," when, in fact, Vantive: 1) "was unable to hire sufficient numbers of qualified persons to grow its direct salesforce at the rate necessary to sustain the level of revenue growth being forecast"; 2) was "unable to adequately train its new direct sales persons"; and 3) was "plagued with very high salesforce turnover." Consequently, the complaint alleges, the sales force was not adequately positioned to meet Vantive's projected sales goals.
The plaintiffs also allege that Vantive misleadingly touted its "extremely strong executive and sales management teams" as being a "key competitive advantage" to its ability to sell and grow Vantive's business, when in fact, Vantive "was suffering serious problems" with its management teams, who "were distracted" and "unable to effectively manage" because of "continual disagreements and in-fighting." The plaintiffs also label as a misrepresentation the defendants' statement that "Vantive's sales cycle was holding steady at 3-6 months," because Vantive's sales cycles were actually "lengthening substantially." Finally, the plaintiffs allege, Vantive misrepresented that it "had very successful growth in its indirect distribution channels," because in reality "Vantive was not successfully expanding its indirect sales channels with new partnerships with HBO, Learning International, EDS or Lucent, as each of these resellers were [sic], in fact, encountering significant difficulties in sublicensing Vantive's ... products,...
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